1. The Icelandic banking sector was experiencing severe tensions after the collapse of Lehman Brothers. On 7 October 2008, the Icelandic government announced that if necessary, it would provide additional funds for the DGS, should it be unable to meet the depositors’ payouts in the event of bankruptcy of the Icelandic bank. However, Iceland refused to guarantee the deposits of foreign branches of Icelandic banks, due to the weak capitalization of the Icelandic DGS, which was in contradiction with EU regulations. This spurred an international dispute between Iceland and the United Kingdom and the Netherlands. As a result, the British and Dutch DGSs paid out guaranteed deposits to customers of Icelandic branches in their countries, while demanding the compensation from the Icelandic authorities.
2. Directive 94/19/EC of the European Parliament and of the Council of 30 May 1994 on DGSs (later amended by Directive 2009/14/EC of 11 March 2009).
3. Some countries had established national investor protection schemes before, however, directive set a uniform rules for all EU members.
4. It means generally a combination of ex ante and ex post funding.
5. For a study of these issues, see inter alia, Karels, G.V. and McClatchey, C.A. (1999) Deposit insurance and risk-taking behavior in the credit union industry. Journal of Banking and Finance 23(1999): 105–134; Demirgüç-Kunt, A. and Detragiache, E. (2002) Does deposit insurance increase banking system stability? An empirical investigation. Journal of Monetary Economics 49(7): 1373–1406; Hovakimian, A., Kane E. J. and Laeven, L. (2003) How country and safety-net characteristics affect bank risk-shifting. Journal of Financial Services Research 23(3): 177–204; Bartholdy, J., Boyle G.W., and Stover R. D. (2003) Deposit insurance and the risk premium in bank deposit rates. Journal of Banking and Finance 27(4): 699–717; Gropp, R. and Vesala J. (2004) Deposit insurance, moral hazard and market monitoring. Review of Finance 8(4): 571–602, doi: 10.1093/rof/8.4.571; McCoy, P.A. (2007) The Moral Hazard Implications of Deposit Insurance: Theory and Evidence. Paper presented at a Seminar on Current development in Monetary and Financial law, Washington DC, 23–27 October; Angkinand, A. and Wihlborg C. (2007) Deposit Insurance Coverage, Credibility of Non-insurance, and Banking Crises. Working Papers 2005–10, Copenhagen Business School, Department of Finance; Angkinand, A. and Wihlborg C. (2010) Deposit insurance coverage, ownership, and banks’ risk-taking in emerging markets. Journal of International Money and Finance 29(2): 252–274; Hwang, D.-Y., Shie, F.-S., Wang,K. and Lin, J.-C. (2009) The pricing of deposit insurance considering bankruptcy costs and closure policies. Journal of Banking and Finance 33(10): 1909–1919; Forssbaeck, J. (2011) Divergence of risk indicators and the conditions for market discipline in banking. SUERF Studies, SUERF – The European Money and Finance Forum, number 2011/4, May; Ioannidou, V.P., and Penas M. F. (2010) Deposit insurance and bank risk-taking: Evidence from internal loan ratings. Journal of Financial Intermediation 19(2010): 95–115; Anginer, D., Demirguc-Kunt A. and Zhu M. (2014) How does deposit insurance affect bank risk? Evidence from the recent crisis. Journal of Banking and Finance. 48(11): 312–321.